Market

Market is a place where buyers and seller

gather in order to buy and sell a
particular goods or commodity. It is not
restricted to a building, place or area.
Kinds of Market
Perfect
Competition
Monopoly
Monopolistic
Competition
Oligopoly
Perfect Competition
Perfect competition is a market structure characterized
by a complete absence of rivalry among the
individual firms. The features of perfect competition
are

a) large number of buyers and sellers
b) product homogeneity
c) free exit and exit of firms
d) profit maximization
e) no government regulation
f) perfect mobility of factors of production
g) perfect knowledge


Demand curve of perfect
competition
The demand curve in perfect competition
is infinitely elasticity which indicates
that the firm can sell any amount of
output at the prevailing market price.
P AR =MR
o
output
Short run Equilibrium
TR & TC Method
In this method a firm is in equilibrium when it
maximizes its profit, defined as the difference
between total cost and total revenue.
O
TR
TC
Xa Xe
Xb
Max
of
profit
loss
Loss
Marginal revenue & marginal cost
method
In the short run firm can earn normal profit, super
normal profit and also losses.
MC
AC
AR=MR
e
o
p
q
AR=MR
AC
MC
e
p
p1
e1
q
o
MC
AC
e1
e
p
p1
o q
Industry equilibrium in the short
run
Given the market demand and the market
supply the industry is in equilibrium at that
price at which the quantity demanded is
equal to the quantity supplied.
s
d
d
s
e
q
q1 q2
e
e
e1
p
p
p1
p1
e1
p
Ac
Mc Mc Ac
Long run firm equilibrium
In the long run firms are in equilibrium when they
have adjusted their plant so as to produce at their
long run AC curve, which is tangent to the demand
curve defined by the market price. In the long run
the firms will be earning just normal profit.
s
s
S
S
d
d
LAC
SAC1 SMC
p
p1
e
b
A
p
LMC
SAC
SMC
Long run equilibrium of
industry
The industry is in equilibrium in the long run when price
is reached at which all firms are in equilibrium. The
industry produces at the minimum point of LAC curve
and makes only normal profit.
s
d
s d
p
o
Q
LAC
SAC
LMC
SMC
X o
Effect of Taxes on Price and
Quantity
Imposition of a Lump Sum
Tax
Imposition of a Profit Tax
Imposition of a Specific
Sales Tax
Imposition of a Lump Sum Tax
Increase in fixed cost
Upward shift of AFC and AC curves
AVC and MC do not affected
In short run no effect on equilibrium
In long run supply will decrease and
price will increase
Imposition of a Profit Tax
Effects are same as those of a lump
sum tax
No effect on MC and short run
equilibrium of the firm and industry
In long run supply will decrease and
price will increase
Imposition of a Specific Sales
Tax
It affects MC curve of a firm
Burden of tax on consumer depends on
price elasticity of supply with given
demand
The more elastic supply, the higher
burden of a specific tax on consumer
and less the burden on the firm